How to Develop a Strategic Board of Directors with the Balanced Scorecard
Developing a Balanced Scoreboard for the Board of Directors is a great way to align their roles, responsibilities and priorities with the corporate strategy. Discover the best way to develop it and optimize your Board’s performance.
Most Balanced Scorecard implementations focus on aligning the organization and creating synergies, both inside and among business units.
However, companies also turn to the Balanced Scorecard to improve their governance processes and their communication with shareholders. And, as is well known, the main component of the entire intermediation and governance system is the company’s Board of Directors. A proactive and engaged Board is essential for designing and executing a strategy successfully.
Board of Directors: Roles and Responsibilities
The Board of Directors adds to the organization’s performance when it fulfills the following five responsibilities:
1. Ensure integrity and compliance
Board members should guarantee that the reports and information disclosed accurately represent the company’s key performance factors, as well as its most pressing risks. They should also control the level of risk engaged in by the company and verify that executives implement adequate risk management processes to mitigate the consequences of adverse events.
The Board must guarantee that the company has the necessary internal controls to prevent the loss of assets, information and prestige. It must also ensure that the managers adopt an ethical behavior that falls in line with the company’s Code of Conduct in its interactions with suppliers, clients and employees. Lastly, it must verify that the employees adhere to the compulsory regulations, so as to not jeopardize the company’s assets or operations.
2. Approve and verify the organization’s strategy
The Board should ensure that the CEO and the executive team fulfill their responsibility of formulating and implementing the strategy.
Likewise, it should fully understand and approve the corporate strategy, approve the main decisions related to its implementation, and continuously control its execution and results. It is therefore crucial that the members of the Board know the key value drivers and the organization’s risks.
3. Approve the principal financial decisions
The Board of Directors guarantees the effective and efficient use of the financial resources to achieve the company’s strategic objectives. This includes the approval of annual operative and capital expenditure budgets and the authorization for large investments, new loans or reimbursements as well as acquisitions and fusions.
4. Select and evaluate the top-tier executive
The members of the Board select the CEO and determine his or her salary. They also approve the recruitment of other executive team members, such as the CFO and the COO. Once a year the Board evaluates the CEO and executive team’s performance and revises their salary as seen fit.
5. Provide advice and support to the CEO
Board members share their expertise, knowledge and recommendations when the executive team describes the strategic opportunities and important decisions at hand.
Limited time, limited information
To fulfill their multiple responsibilities, Board members must have a vast knowledge of the company; they must understand its financial outcomes and the competitive position it holds, as well as its clients, new product launches and its workforce’s skills and capabilities.
Therefore, companies must find a way to optimize the information that the Board receives and must evaluate previous to the meetings, as well as the information presented during these.
A corporate governance system developed around the Balanced Scorecard helps the Board face two of its most pressing challenges: limited time and limited information.
The Balanced Scorecard and the Corporate Governance Process
Nowadays many companies use three levels of scorecards as the basis for their corporate governance system.
1. The Organizational Scoreboard
The process commences with the organizational scoreboard. The Board approves the firm’s strategy map, strategic objectives and indicators, as well as the targets and incentives linked to their performance. The main objective of the organizational scoreboard is to help the CEO communicate and implement the corporate strategy throughout the organization.
This scoreboard plays a central role in the governance process as it provides board members with the financial and non-financial information they need to supervise the organization’s performance.
Through it, the Board can access updated information about important trend indicators, such as consumer feedback on value attributes and changes in market share.
2. The Executive Team’s Personal Scoreboards
The second components of the corporate governance system are the executive team members’ individual scoreboards.
These scoreboards describe the strategic contributions of key employees. They help the CEO and the Board separate their expectations of executive performance from their expectations of the company’s performance as a whole. Also, the Board of Directors and the Compensation Committee may use these to select, evaluate and remunerate top-tier executives.
To develop them, the CEO and the executive team reach an agreement about the organizational objectives that will become each team member’s main responsibility, and then use these objectives to shape the individual scoreboards.
By aligning these scoreboards to the strategy, the Board has access to an explicit mechanism by which to evaluate their performance, and therefore, calculate their compensations based on objective indicators.
3. The Board of Directors’ Scoreboard
Implementing this scoreboard has the next benefits:
- It defines the Board’s strategic contributions
- It provides a tool to manage the Board’s structure and performance
- It clarifies the strategic information and inputs required by the Board
This scoreboard uses a stakeholder perspective which reflects the Board’s responsibilities with regards to investors, regulatory bodies and the community. These responsibilities include:
- Approving the plan, verifying the organization’s performance and defining high-level performance objectives for the organization.
- Evaluate and strengthen executive performance.
- Guarantee the organization’s compliance to regulations, laws and community standards, as well as the adequate use of internal control mechanisms.
The Board ensures that managers are providing shareholders with valuable information and that executives are using shareholder capital to pursue the long-term interests of the latter.
Therefore, the Internal Process perspective contains the objectives that will allow board members to fulfill shareholder and stakeholder expectations. They should be divided into three main strategic themes: Performance Supervision, Executive Performance, and Compliance, Communication and Corporate Responsibility.
Better Understanding, More Responsibility
This approach provides the information and necessary structures to enable the Board to fulfill its responsibilities more effectively. At the same time, the transparency conveyed by these scorecards endorses the Board’s responsibilities.
The organizational Balanced Scorecard informs the Board of the strategies the organization intends to implement. The executive’s individual scoreboards provide a clear base to monitor the management team’s performance, compensate them based on compliance to strategic targets and evaluate the executives’ career and succession plans. Lastly, the Board’s scoreboard informs all its members of their responsibilities and facilitates the periodic evaluation of their performance, based on clearly defined and comprehended criteria.
Where to start?
At TRISSA we can help you align your whole organization to your strategy, and achieve better results, by developing its strategy map, corporate Balanced Scoreboard, the executive team’s individual scoreboards and your Board of Administration’s scoreboard.
Author: Trissa Strategy Consulting
Source: Lorsch, Jay W. "Smelling Smoke: Why Boards of Directors Need the Balanced Scorecard." Balanced Scorecard Report (2002): 9-11. Online journal.